Market Advisor | Cowherd Expansion Charts

Figure 1 depicts the long-run upward price trend of live-cattle futures from February 2009 to June 2013. A five-year statistical trend indicates a $14.02 average price increase each year during this period.

In 2006, the beginning of the biofuels era, corn price started to move upward. Today’s volatile corn market is now a driving force for the economics of ranching. Markets tend to overreact on the upside and the downside, which fuels corn price volatility.

Figure 3 presents my simulated average farm-level corn price used for growing and finishing calves based on the year of calf birth. Remember, calves are born on the ranch in one year and grown and harvested the next year. These calculated feedlot corn prices assume that the corn was purchased monthly as it was fed.

Figure 4 presents the average cost of gain (COG) calculated in my retained ownership simulations for western Nebraska/eastern Wyoming feedlots. This COG is posted to the year the calves were born. Note how COG has increased as we’ve moved through the biofuels era.

Economic theory suggests that when a major input cost goes up, the industry utilizing that input reduces its production. That’s exactly what happened to the beef industry in the biofuels era – high corn prices led to a lower national beef cowherd.

Texas, with 5 million beef cows, drives the U.S. industry. When a severe drought hits Texas, the U.S. cowherd shrinks. The economic reality is that when Texas and the Southern Plains restock, there will be a nationwide economic opportunity for herd expansion. This month, I’ll focus on that expansion potential.